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New regulations to impact US MMFs, says Western Asset Management


In today's complex financial markets, even the way investors manage their cash is changing, fast. So warns Western Asset Management, an affiliate of Legg Mason, in a new white paper, "The New Frontier: Managing Cash Investments."

For almost 40 years, money market funds offered a comprehensive solution for cash investors. They generally seek to provide three main benefits – preservation of capital, liquidity and yield – all with simple structures. The new post-crisis regulatory regime, however, coupled with unprecedented low interest rates, has fundamentally changed the dynamics of short-term markets.

"Investors may find it increasingly challenging to capture all of the traditional benefits of money market funds," says the author, Western Asset Management portfolio manager/research analyst Michele Mirabella. With money market funds changing in ways large and small, "This creates opportunities for cash investors to take a more proactive and dynamic approach."

The white paper can be accessed via the Western Asset web site. 

Between regulatory overhauls and unprecedented market conditions, a fundamental shift has occurred in the way investors think of "cash." The historical approach of utilising money market funds to provide simple cash alternatives is likely to be transformed in the near future.

"While we still believe that money market funds will continue to provide investors many benefits, we think that cash investors can also view this as an opportunity to take a more dynamic approach to their cash management strategies," Mirabella advises.

By adopting more efficient approaches to managing risk and liquidity, investors can realign cash needs to better meet strategic objectives. An initial step is to carefully review existing investment policies. These policies create roadmaps of specific risk tolerances and liquidity needs, as well as parameters for achieving investment goals. A dynamic and broad investment policy can provide investors the flexibility to respond to market fluidity and changing cash needs.

Mirabella and her team believe it important to conduct a thorough evaluation of future liquidity needs. Once complete, cash investors may consider segmentation or cash bucketing.

"Cash can fall into a minimum of three distinct categories: operating cash, core cash and strategic cash," Mirabella writes. "By allocating cash investments over multiple time horizons, investors may be able to achieve optimal returns by separating operational cash needs from longer horizon strategic needs."

In the coming months, this simplistic approach may require additional precision: multiple strategies may need to be utilised for the deployment of cash. Investors thus may be able to more efficiently allocate their short-term investments to better meet strategic objectives by considering a broader array of product solutions for liquidity management, such as ultra short duration funds or separate accounts.

"Investors need to prepare for the future and rethink their cash management strategies," Mirabella concludes. "As investors gain a better understanding of the dynamics of this new environment, they will be better equipped to meet its challenges."

"Western Asset is committed to working with our clients to help them navigate this new frontier, helping to ensure that they are prepared to optimise their liquidity management strategies."

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